Page 10 - Budget Newsletter 2021

Business Owners

Corporation Tax Rate

The rate of corporation tax has been 19% since 1 April 2017. From 1 April 2023, for companies with profits of
£250,000 and more, the rate will rise to 25%. For companies with profits of up to £50,000 a revived smaller
companies’ rate means that a 19% rate will continue. Between £50,000 and £250,000 of profits there will be a new
relief which effectively means 19% on the first £50,000 of profits and 26.5% on the excess.

At present, operating via a company creates the opportunity to draw income as dividends, free of (NICs, and shelter
profits at a corporation tax rate that is below the basic rate of income tax – rather than personal tax rates on earnings
of up 45% (46% in Scotland). From April 2022, the increased rates for NICs and additional tax on dividends will change
the calculation of relative advantage. A year later, the increased rate of corporation tax will bring about another
revision in the financial maths for businesses with profits over £50,000.

Capital Allowances

Capital allowances have been subject to a variety of changes in recent years, ostensibly to encourage an increase in
business investment.

The Annual Investment Allowance (AIA), which gives 100% initial relief for investment in plant and machinery, was
‘temporarily’ raised to £1,000,000 for two years from 1 January 2019 —That period was then extended to 31
December 2021. The AIA has been a favourite measure for Chancellors to tweak, so it is not surprising that Mr Sunak
announced yet another extension for the £1,000,000 AIA, this time for 15 months, to 31 March 2023. In theory, the
AIA will automatically revert to its previous £200,000 level on 1 April 2023.

Until that date the AIA is largely eclipsed for companies by the March Budget’s ‘super-deduction’ of 130% of the
amount invested in new qualifying plant and machinery. This effectively means a £247 tax reduction for each £1,000
of investment at the current corporation tax rate of 19%. For certain long-life assets, the 6% writing down allowance is
supplemented by a 50% first year allowance, also running until April 2023.

Losses

The pandemic has led to many businesses trading at a loss. The Chancellor recognised this in the Spring Budget and
temporarily extended the period over which both incorporated and unincorporated businesses can carry back trading
losses from one year to three years.

The extension applies to up to £2m of an unincorporated business’s unused trading losses made in each of 2020/21
and 2021/22. The same limit is relevant separately to companies’ unused trading losses, after carry back to the
preceding year, in relevant accounting periods ending between 1 April 2020 and 31 March 2021 and for the following
accounting period. The £2m ceiling is a group-level limit. As a result, groups with companies that have the capacity to
carry back losses above £200,000 are required to apportion the cap between their constituent companies.

PLANNING POINT

For now, loss relief means losses are more valuable and readily usable. Make sure you check your business’s
opportunity to claim back tax if you have made a loss.

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